Categories

A categorical view of corporate reputation explains how organizations are grouped together in an economic market according to the attributes they share. Relevant stakeholders as audiences evaluate the reputations of these organizations based on their commonly shared features. This entry explains the coupling of criteria and audiences, meaningfully bound in a social category. It first discusses categories in management and organizational theory and then how criteria bond reputations to categories.

Beginning in the 1980s, management research focused on the cognition questions of what constituted strategic groups as clusters of firms in economic markets. This research observed that organizations focused on the actions of a small set of competitors. This mutual attention was not determined by an authoritative source but governed by the logic of similarity. This was a departure from the economic view of rivalry being primarily a function of resource profiles. In considering the processes of strategic groups being formed based on perceived similarities, firms acting as individuals construct “cognitive communities.” In a broader sense, firms are seen to organize into categories of understanding about one another and their products through socio-cognitive dynamics.

This work in management was combined with similar work in economic sociology and population ecology to form a major stream of thinking about categories in organizational theory. A major tenet of this theorizing is that categories are social constructions that serve as the cognitive infrastructure of markets. Economic actors simplify their attention and cognition by focusing on small sets of actors and common expectations that lead to exchange. In this sense, categories are lenses that enable producers to recognize rivals, consumers to compare products, and critics to classify products and firms.

Contemporary category theory maintains the argument of actors economizing their cognition but focuses on how relevant stakeholders, as audiences, construct shared definitions. Relevant audiences are the group of analysts, consumers, producers, journalists, and critics who share an interest in the features that define this common activity. The market category is the cognitive representation of these shared definitions that economic actors use to structure markets.

How firms are classified has an important impact on the manner in which reputations are evaluated. The perceptions in stakeholders’ understandings could be around the quality of a firm’s products or its competitive strategies, or they could be an accumulated appraisal of its performance over time. In stable markets, this evaluation is relative in terms of the firm itself over time and also the relevant grouping of similar firms. Audiences commensurate the evaluation of firms through ranking lists. If a firm is not considered relevant enough to be evaluated by audiences, then the perceptions around its quality and worth will not be clear. Boundary beliefs that demarcate common understandings of a market category contain specific reputation criteria for firms. Thus, a category helps answer the question “What kind of firm is it?” This commensurability forms the basis for reputational ranking systems, whereby firms are evaluated in a bounded space. This evaluation occurs through social objects being grouped into categories that are legitimate and well understood.

Prototypes

Categories are social constructions that contain shared definitions of groupings. They delineate boundaries of legitimacy according to a particular criterion or logic, which emphasize the common properties among members. A category thus has a set of members and a logic linking them together. Certain features shared across members help constitute what is typical of the category. Those members that hold many features in common with other members are typical and known as prototypes. In turn, the membership of the category is tied to how similar the member is to the prototype.

This prototype perspective in category theory is based on the work of cognitive psychologist Eleanor Rosch, who helped usher in an era of work around prototypes as extending the logic of family resemblances. This fuzzy view of categorization holds that objects of a similar type can have resemblances even if they are not identically formed. Rosch notably brought an understanding that people do not think about categories in the formal way that Aristotle suggested, with common members sharing necessary and sufficient conditions. This prototype view suggests that, in practice, categorizing social objects has more to do with a comparison to a representative schema of a category than a formalized one.

To explain the prototype perspective with a simple example, consider how unknown birds are classified. Within common understandings of birds, a robin is a better representative of a bird than a chicken or penguin because it is more typical of what is known about birds. Birds are commonly thought of as flying, eating worms, and building nests from twigs. Therefore, when evaluating whether an animal is a member of the bird category, audiences will compare this animal with the robin. Exemplars are “better” members of a category. Prototypes thus are pure types that possess the coding types of that category. If bird watchers were attempting to categorize an unknown animal, they would likely initially consider how similar it is to a robin.

The Categorical Imperative

When applying the prototype perspective of categories to markets and reputations, audiences impose a disciplining logic on firms. Markets are segmented into different categories defined by prototypes. The more features a firm has in common with the prototype, the easier it is for audiences to understand and securely categorize. When firm behavior deviates from expectations and makes perceptions unclear, audiences may overlook them and consistently undervalue any related products or equities.

Audiences attempt to place firms into established categories. When they have trouble understanding a firm, the uncertainty prevents them from adequately categorizing it. The categorical imperative is the external validity that audiences bring in following a set of firms that make up a market category. When firms attempt to signal membership in an established category, they are in effect aiming to attract the audience that helped construct that category. Failure to attract audiences prevents the firm from gaining legitimacy, which leads to financial, social, and psychological penalties.

The work in this literature shows that firms tend to be considered more typical within one category when they span a few other categories. This is due to the logic of a focused firm being closer to a category prototype. Although there are potential portfolio benefits to belonging concurrently to several different categories, firm reputation particularly suffers from the penalties. Firms that are prototypical enable audiences to understand them through their being easily fit into cognitive expectations. When firms do not span across categories, they may still be discounted if they have a lower fit with the category schema.

Implications for Corporate Reputation

A categorical perspective on corporate reputation is largely focused on the role of audiences in disciplining the behavior of firms. This enables a boundary on which rank order systems can be employed to evaluate firm reputations. Another consequence of this is that collective identities form around common features and criteria. Clear perceptions and evaluations of firms in a category are then based on how well they function along these dimensions.

This categorical logic affects the construct of reputation in so far as firm behaviors are governed by the expectations of audiences. As the cognitive infrastructure of markets, categories bring a structure by grouping firms around well-understood prototypes. This makes reputation a relative measure among firms of the same type. This informs stock evaluations, competitive rivalry, and the survival of new firms in nascent markets.

Although much of this work draws on the mechanism of the categorical imperative, there are also other implications for what it means to have a “good” reputation in a category. In the related construct of identity, a firm may be viewed favorably relative to a category prototype. In this sense, the prototype definition is the minimum condition for membership in the category, but reputation can be boosted based on other assessments. Thus, a firm’s reputation will be penalized if it does not meet the minimum standards of membership, but there are potential upsides around identity that are beyond simply being included as a member. A second, related construct that categories enable is that of status. The status of a firm arises from observing its affiliations. An association with a category of high-status firms will confer that status on a firm. Status and reputation may then be coupled in how the audience views the firm’s behavior and its affiliations.

Inherent in this discussion is the concept of category contrast. That is, the mechanism of a categorical imperative is based on an assumption of sharp category boundaries. This is always the case, and indeed some category schemas may have more overlap than others. Furthermore, another assumption in this discussion is that of the well-established meaning of a category in the minds of an audience. Population ecology has observed that categories emerge and settle over time, where meanings materialize into codes along with a consensus over a label. These codes are assigned features for establishing firm membership, and the label helps bring initial order to the common space.

Conclusion

Categories provide the cognitive infrastructure for markets. Corporate reputations are cognitive representations of aggregates of collective perceptions by audiences. A category provides the platform and boundaries for corporate reputations to be constructed by an audience. In this sense, firms do not “own” their corporate reputations, despite clear evidence that they are strategic assets. A relational definition of reputation suggests that a firm has a reputation “for something” with “some people.” This is made possible through the social structure of categories. As such, these categories must be seen as legitimate by audiences to have currency. A firm may attempt to sway categorization through impression management practices; however, audiences may not pay attention, in which case through the categorical imperative, its reputation will be penalized. Reputations are socially constructed through criteria established around common features and sustained in an institutional arrangement.